USD/JPY Volatile After New Multi-Decades High

USD/JPY Analysis

The pair runs its fourth straight profitable month and reached today the highest levels since late-1986 (160.23), but turned negative after the peak. The volatility and the immediate slide has sparked speculation that Japanese authorities may have stepped in the FX market to support the ailing yen, although there has not been confirmation of such action at this point. There had been similar guessing in October of last year, but that had not turned out to be the case. Authorities had actually intervened in September of 2022, at much lower levels (at around 145.90) and again a month later.

The pair's surge over the past four years, has largely been a result of the policy differential between the two central banks. The Fed has raised rates to multi-decade highs, while its Japanese counterpart has been implementing ultra-loose policies. Policy dynamics are shifting, but this transition is very slow and as such, has failed to prevent further rise of USD/JPY.

The Bank of Japan ended its negative interest rates era in March and abandoned the yield curve control, but continues to buy government bonds, while pledging to maintain an accommodative stance. In the latest decision on Friday officials raised their median inflation forecasts (ex-fresh food) and are ready to remove accommodation if their outlook materializes, but still expect to keep an accommodative setting for the time being". [fn ref="1"]

The US Fed on the other hand, has pointed to rate cuts this year, but policymakers have turned cautious towards such moves, as robust labor market, strong economy and persistent inflation raise the bar for a pivot. Friday's hotter than anticipated PCE report exacerbated these theme, while markets have substantially downgraded their pricing for the timing and extend of such actions.

Today's peak came in the aftermath of the latest BoJ decision and the hot US inflation report and brings 165.00 in the spotlight. On the other hand, it's reasonable to anticipate at least another hike by the Japanese central bank this year, will the Fed is still expected to start lowering rates. The shift in policy dynamics along with intervention risk can weigh on USD/JPY. It already falls and it is exposed to the EMA200, below which the bullish bias would pause. However, the downside is technically unfriendly, with the ascending trendline from the December low and the daily Ichimoku cloud providing roadblocks. Markets now turn to Wednesday's Fed decision for more clues as to the bank's intention that could determine the pair's trajectory.